Lower Fuel Costs Shoring Up The Bottom Line For Many Carriers

The International Air Transport Association (IATA) announced an upward revision of its 2015 industry outlook to a $29.3 billion net profit. On expected revenues of $727 billion, the industry would achieve a 4.0% net profit margin. The significant strengthening from the $16.4 billion net profit in 2014 (re-stated from $19.9 billion) reflects the net impact of several global factors, including stronger global economic prospects, record load factors, lower fuel prices, and a major appreciation of the US dollar.

All regions are expected to see an improvement in profitability in 2015 compared with 2014.There are, however, stark differences in regional economies, which are also reflected in airline performance. “The industry’s fortunes are far from uniform. Many airlines still face huge challenges,” said Tony Tyler (pictured), IATA’s Director General and CEO.

Over half the global profit is expected to be generated by airlines based in North America ($15.7 billion). For North American airlines, the margin on earnings before interest and taxation (EBIT) is expected to exceed 12%, more than double that of the next best performing regions of Asia-Pacific and Europe.

“For the airline business, 2015 is turning out to be a positive year. Since the tragic events of September 2001, the global airline industry has transformed itself with major gains in efficiency. This is clearly evident in the expected record high passenger load factor of 80.2% for this year. The result is a hard-earned 4% average net profit margin. On average, airlines will retain $8.27 for every passenger carried,” said Tony Tyler, IATA’s Director General and CEO.

“Let’s keep things in perspective. Apple, a single company, earned $13.6 billion in in the second quarter of this year. That’s just under half the expected full-year profit of the entire airline industry. We don’t begrudge anyone their business success. But it is important for our stakeholders, particularly governments, to understand that the business of providing global connectivity is still a very tough one,” said Tyler.

At the industry level, a significant milestone has been achieved with an expected return on invested capital (ROIC) of 7.5%. For the first time, the industry-level average ROIC will be in excess of its cost of capital, which has fallen to 6.8% largely due to lower bond yields. This industry average is, however, dominated by airlines in the United States, which have benefitted the most from the fall in US dollar-denominated fuel prices, a strong local economy, and industry restructuring. The average non-US airline is still struggling with returns below the cost of capital and a significant debt burden.

The recent decline in fuel prices is a welcome development. The 2015 industry outlook is based on an average Brent crude oil price of $65/barrel, which is 36% below the 2014 price of $101.4. Jet fuel prices are expected to decline at a slower rate for a full year price of $78/barrel (33% below the $116.6 level of 2014). Fuel still represents approximately 28% of the industry’s operating cost structure. And the full impact of the fall in fuel prices is being moderated by a 20% rise in the value of the US dollar over the past 12 months as well as by airline hedging policies, which have locked about half of the 2015 fuel supply at higher levels.

The impact of the stronger US dollar can be seen in a 0.7% decline in the industry’s overall revenues, which are expected to be $727 billion ($733 billion in 2014).

The passenger business is expected to grow some 6.7% in 2015, an acceleration on the 6.0% growth recorded in 2014. Passenger numbers are still expected to top 3.5 billion for the first time in 2015. A focus on efficiency is seeing supply matched more closely than ever with demand and is expected to produce a record high load factor of 80.2%. A yield decline of 7.5% reflects the stiff competition in the business but is exaggerated by the impact of the US dollar appreciation.

The cargo business is expected to grow 5.5% this year, which is a slightly slower pace than the 5.8% realized in 2014. There was a strengthening of the cargo business in 2014 that continued into this year. Expected revenues—estimated at $62 billion—would have exceeded the $67 billion peak in 2011 were it not for the appreciation of the US dollar. The improvement is delivered through a volume increase with a record 54.2 million tonnes of air cargo expected in 2015. Yields are expected to fall around 7% this year (a decline that is again exaggerated by the strength of the US dollar). The longer-term prospects for air cargo remain challenging with a continuing post-financial crisis trend of slower trade growth relative to GDP.

FMI: www.iata.org